Is Arezzo Indústria e Comércio (BVMF:ARZZ3) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Arezzo Indústria e Comércio S.A. (BVMF:ARZZ3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Arezzo Indústria e Comércio

How Much Debt Does Arezzo Indústria e Comércio Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Arezzo Indústria e Comércio had R$547.2m of debt, an increase on R$190.6m, over one year. But it also has R$566.2m in cash to offset that, meaning it has R$19.0m net cash.

How Healthy Is Arezzo Indústria e Comércio's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arezzo Indústria e Comércio had liabilities of R$818.4m due within 12 months and liabilities of R$272.6m due beyond that. Offsetting this, it had R$566.2m in cash and R$507.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Arezzo Indústria e Comércio's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the R$6.39b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Arezzo Indústria e Comércio also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Arezzo Indústria e Comércio's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Arezzo Indústria e Comércio made a loss at the EBIT level, and saw its revenue drop to R$1.4b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Arezzo Indústria e Comércio?

Although Arezzo Indústria e Comércio had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of R$30m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Arezzo Indústria e Comércio (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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